Now, more than ever, we are seeing the bonds that previously held together businesses beginning to fray. As cashflow dries up, staff are stood down or laid off and creditors begin to circle, tensions within businesses are rising.
In closely held businesses where shareholders are integral to the day-to-day running of the business and in partnerships, members are looking at each other’s performance and questioning whether the relationships that previously worked can continue in their current form.
So, what do you do if you want to remove a member, or, if you are being removed?
In companies, shareholders’ agreements and the company constitution are the principal documents that usually regulate the removal of members; in partnerships, it is usually the partnership agreement. These documents typically, but not always, set out the procedure to remove directors or partners and for the buy-out of members’ interests.
However, in the absence of specific provisions providing for the removal of members, parties have recourse to statute and the general law.
A common response for a member being removed is to allege oppressive conduct and apply to the court, or threaten to do so, for an order that the company be wound up on just and equitable grounds (for a company) or for the appointment of a receiver (for a partnership). This is often the “nuclear” option; a threat to blow up the business if the member is removed or does not get what he or she wants. But courts are generally reluctant to wind up a solvent business, or appoint a receiver to a partnership where some partners wish to remain in partnership, without good reason.
For companies, rather than winding them up, courts have wide ranging powers under the Corporations Act 2001 to, for example, require the purchase of a member’s shares if there has been oppressive conduct.
For partnerships, rather than appointing a receiver, a court can order a buyout of a partner’s interest at an independently determined price, which is known as a Syers v Syers order.
In companies where the member is also a director, rallying the other members to vote him or her out is an often-utilised approach. However, even if removed as a director, that member’s shareholding remains and needs to be dealt with otherwise he or she can cause a significant amount of disruption to the company.
Absent specific provisions in the shareholders’ agreement or the company constitution providing a mechanism for a forced buy-out, it is very difficult to acquire a minority member’s shares against his or her will. In these circumstances negotiating the acquisition of that member’s interest is key.
While every situation is different, if a settlement can be reached, some of the issues we have found that generally need to be considered include:
- how are the assets to be divided;
- who is to pay any tax;
- how are entitlements, fees and dividends to be dealt with;
- how will loans be dealt with;
- are there formal resignations required;
- do financiers and suppliers need to be informed and if so, what is the effect on the arrangements with those parties currently in place;
- what is the extent of any releases and indemnities to be provided; and
- will there be any restraints on any parties.
A well drafted settlement agreement is vital to cover off on these issues.
As with any dispute, it is best to get in front of these issues early. If you have any queries about an internal company or partnership dispute, please contact our Dispute Resolution team.